UK Competition Commission Research Articles

To what extent can we rely on contestability in merger policy? Ex post evidence from McGill’s/AWS

The McGill’s/AWS merger was cleared by the UK Competition Commission mainly on the basis of its belief that the threat of entry would be sufficient to prevent unilateral effects from arising post-merger. This is very close to argue that these local bus markets were contestable. This ex post evaluation case study based on the publicly available data and information on frequencies and fares suggests that the entry threat may have not been a strong disciplining force post-merger.

To What Extent Can We Rely on Contestability in Merger Policy? Ex Post Evidence from the McGillls/AWS Merger Decision

The McGill’s/AWS merger was cleared by the UK Competition Commission mainly on the basis of its belief that the threat of entry would be sufficient to prevent unilateral effects from arising post-merger. This is very close to argue that these local bus markets were contestable. This ex post evaluation case study based on the publicly available data and information on frequencies and fares suggests that the entry threat may have not been a strong disciplining force post-merger.

Relative bargaining power in light of the current debate on audit market regulation

This study examines relative bargaining power of a continuous auditor-client relationship in the German audit market to determine whether auditors can exert their power at the expense of clients. It responds to findings published by the UK Competition Commission in 2013 which assumes audit market features to impair clients' bargaining power, resulting in adverse effects on competition. By relating bargaining power to the fee negotiation process, we treat the existence of companies with positive abnormal audit fees (with negative abnormal audit fees) over the entire period of study as an indicator for auditors' bargaining power being greater than clients' bargaining power (clients' bargaining power being greater than auditors' bargaining power) for these auditor-client relationships. Our results do not suggest that the CC's assumption, i.e., auditors' bargaining power to be greater than clients' bargaining power during a continuous auditor-client relationship, holds for the audit market segment of study.

EU Competition Law Developments in the Aviation Sector from 4 July to 31 December 2013

The second half of 2013 has seen continued activity in the aviation sector, particularly on the part of the European Commission ('Commission') which issued five new merger decisions. At the start of 2013 we saw the Commission prohibiting Ryanair's second takeover bid for Aer Lingus. Some no doubt wondered if the Commission would also prohibit Aegean Airlines' second takeover bid for Olympic which had previously been prohibited in January 2011.Also of note was the UK's Competition Commission ('CC') issuing its Final Report into Ryanair's minority shareholding in Aer Lingus This article considers the UK consultation relating appeals of licence conditions imposed on operators of dominant areas at dominant UK airports, reviews the ongoing and closed investigations, reviews relevant judgments of the European Courts (the General Court and the Court of Justice), as well as those cases awaiting judgment and concludes with a review of some relevant State aid decisions. Somewhat surprisingly there do not appear to have been any aviation mergers notified to regulators in the EU over the last six months.

The Geography of Grocery Demand in the UK: An Evaluation of the 2003 Morrisons-Safeway Merger

In 2003, the UK Competition Commission (CC) approved the acquisition of Safeway plc by Wm. Morrisons plc, respectively the fourth and sixth largest firms in the industry. Because Morrisons focused on the North and Safeway on the South, this merger had the potential to create a fourth national champion to rival Asda, Sainsbury’s, and Tesco, hopefully improving competition, lowering prices, and improving quality for consumers. But, the merger could also have had an adverse affect on competition by creating pockets of local market power which the merged firm could exploit. To evaluate the CC’s decision, I construct a geographic distribution of demand which models the local interactions between consumer demographics and store locations. My model has several parts. I estimate a Discrete/Continuous structural model of demand from a high quality panel of consumer micro-data (the TNS Worldpanel) to explain both store choice and conditional demand for groceries. After combining this demand system with disaggregate census data, I recover marginal costs and then predict store-level sales and profits as well as willingness-to-pay. I use these tools to evaluate the welfare implications of the merger and of a counter-factual merger between Safeway and Tesco. I find that the changes in prices, profits, and consumer welfare under either merger are quite small – although larger for a Tesco-Safeway merger. Although consumers are slightly worse off under these mergers, the results support the UK Competition Commission’s approval of the merger.

Market power, market outcomes, and remedies in the UK groceries market

AbstractThis article describes a number of the issues that played a central role in the UK Competition Commission's investigation into the UK Groceries Sector. We describe the questions at issue, the evidence collected to address those questions, and the conclusions drawn. We go on to describe the CC's remedies both vertically vis‐à‐vis the supply chain and horizontally vis‐à‐vis markets of high local concentration.

Regulating Alongside Competition – Issues Raised in the UK Airport Market

Airports have different characteristics to the network utilities, such as energy and water networks, and yet have historically been regulated using regulatory approaches originally designed for these natural monopoly businesses. However, airports can – and do – compete with each other and, following the recent decisions by the UK Competition Commission to require BAA to sell three of its airports, this inter-airport competition looks set to intensify. This paper explores the issues that should be considered when the regulation sits alongside competition. This paper describes how the investment incentives created by the application of ‘RPI-X’ style price cap regulation can be similar to the incentives typically associated with ‘rate of return’ regulation; namely the existence of ‘gold plating’ incentives. However, these distortions to incentives also affect non-regulated airports. A model is presented that illustrates the potential for perverse incentives on non-regulated airports and distortions to their investment decisions. Finally, this paper considers the case of the regulation of Stansted Airport, which illustrates that these incentive effects can occur in practice. This paper concludes that regulators should not assume that approaches designed for natural monopolies are suitable for airports markets or in other markets where there is a degree of competition between suppliers.

The economic and social role of small stores: a review of UK evidence

There is considerable concern in the United Kingdom regarding the growing power of supermarkets, a concern that culminated recently in a UK Competition Commission enquiry into the grocery sector. Against this backdrop, some suppliers, independent retailers and societal groups have been critical of the investigation, implying that it did not do justice to the role of small stores in society, and that this issue is insufficiently understood by policy-makers. To address this need, this article reviews and assesses the available UK evidence on the social and economic role of small independent stores and the values that are attached to them by the communities they serve. This is achieved using the Systematic Literature Review methodology. The purpose of the article is to gauge the evidence as a platform for wider debate on how the role of small stores can be maintained and enhanced. The article identifies key themes and gaps in the literature as a basis for identifying research priorities and highlights implications for public policy and planning.

MARGIN-CONCENTRATION ANALYSIS IN THE UK GROCERIES INQUIRY

The UK Competition Commission's recent inquiry into the Groceries sector made the unusual recommendation that organic growth by large incumbents in concentrated areas be prohibited. The key support for this recommendation came from an econometric analysis of the relationship between margins and concentration. We describe the analysis and demonstrate that it suffers from material flaws that cast doubt on the validity of the conclusions drawn from it, and thus on the remedy itself. We identify issues around the nature of debate between investigated parties and the UK authorities on technical issues and make some suggestions for changes to processes.

The food superstore revolution: changing times, changing research agendas in the UK

This article considers the changing scope of research into UK food superstores over some three decades. Rather than catalogue changing market shares by format, we seek instead to show how such change links to national policy agendas. Academic research has evolved to address the growing complexities of the social, technological, economic and political impacts of the superstore format. We exemplify this by tracing the progression of retail change in Portsmouth, Hampshire, over 30 years. We discover that academic research can conflict with the preconceptions of some public policy makers. The position is exacerbated by a progressive decline in public information – and a commensurate rise in factual data held by commercial data companies – that leaves policy makers with a choice of which data to believe. This problem casts a shadow over the objectivity of macro-policy as currently formulated. Concerns currently arise because the UK Competition Commission (2006–2009 but ongoing) starts each inquiry afresh with a search for recent data. Furthermore, it has recently called for changes to retail planning – the very arena in which UK superstore research commenced.

From Ordered Competition – Towards a New Competitive Order? The Role of the UK Competition Commission at the Interface between Sector Regulation and Competition Law

This article examines the interface between sector regulation and competition law, through the example of the experience of the UK Competition Commission. It reviews recent experience in relation to regulatory investigations, market investigations and merger control and considers the relevance of this experience to the future design and implementation of policy and practice where sector regulation and competition law overlap.

Symposium on The Structure of Modern Markets

We look at modern markets and discuss their current treatment by policy makers, analyzing policy recommendations regarding the treatment of such markets in the future. These include recommendations regarding the taxation treatment of informal markets; the presence of market power and anti-competitive strategies in health markets and platform two-sided markets; investment and arbitrage functions in foreign exchange markets; regulation and competition in the Canadian banking sector; asymmetric regulation in mobile termination charges and technological diffusion; incentive regulation in telecoms and its impact on productive efficiency; welfare enhancing government intervention recommendations in broadcasting. Finally, we give an overview of the overall success of the UK Competition Commission as a second stage enforcer of regulatory policy and competition law.

Testing the effectiveness of the proposed UK ‘competition test’

An ongoing inquiry by the UK Competition Commission (CC) – the Groceries Inquiry – has covered supplier relationships, landholdings and, controversially, the topic of planning regulations. The latter lies within the remit of the Department for Communities and Local Government. Accordingly, Competition issues now intrude directly into planning since the identity – fascia – of a proposed retailer taking a new development had previously been disregarded. The CC has produced a set of guidelines to show how a proposed fascia test might be operationalised. Applying them to hypothesised store locations we find that most pass the test: an outcome that carries interesting political ramifications.

Assessing the Effects of a Road Surfacing Cartel in Switzerland

The last couple of years have seen an increasing interest in the evaluation of competition policy both in practice and in academia. With respect to the former, the Office of Fair Trading in the UK, for instance, recently started to estimate the ‘positive impact’ of ist activities on direct benefits to consumers. In academia, recent research shows an increasing interest in special topics such as the effectiveness of merger control, the effects of competition policy interventions or the robustness of certain methods to evaluate competition policy.Against this background, this paper assesses the impact of the detection of a hard-core cartel in the Swiss market for road surfacing on post-cartel competition. In addition to an investigation of supply-side factors, demand-side factors, and market prices, the paper also derives estimates of the economic effects of the decision. The results indicate that the detection of the cartel may have led to short-term price reductions; however, the persistent collusion-friendly industry structure forecloses larger and durable gains for the customers.With respect to the implications of the case study for general cartel policy, one improvement possibility would be to carry out screenings to identify potentially collusionfriendly industries by using a set of collusion factors. Subsequently, these suspicious industries should then be investigated more closely focusing on market structure, market behavior and market results, possibly in the form of ‘inquiries’ conducted by the UK Competition Commission. Such an approach would not only raise the probability to detect cartels directly but it would also create a signal for the firms in the respective industries that they are on a watch. Ideally, one of the companies becomes nervous enough to decide to apply for leniency.

CAUSATION IN EC MERGER CONTROL

“there are ever so many ways that a world might be; and one of these many ways is the way that this world is” (David Lewis, 1986)This article looks at two areas of merger control under EC Law where the principles of causation are applied and, in our view, misapplied. The article traces the development of the concept of the “counterfactual” in antitrust law. It then draws on this analysis in considering the operation of the “failing firm defense,” and in particular the standard of proof employed by the Commission when analyzing the “counterfactual” in relation to the failing firm defense. We argue that the Commission employs an excessively high standard of proof, and that this standard of proof contributes to the drawing of the failing firm defense too narrowly, through a misapplication of the principles of causation. We then proceed to contrast and prefer the approach of the UK Competition Commission in recent cases. In the final part of the article we consider scenarios where two or more mergers are contemplated in the same market at the same time, in cases of both parallel and overlapping mergers. In these complicated scenarios, which require prospective, multifaceted analysis, we set out in detail how, despite inherent difficulties, a similarly rigorous application of the principles of causation produces coherent results.

Appealing to the UK competition commission

The paper takes a broad overview of the structure of regulation in the UK, arguing that it is essentially a two tier structure. The first tier consists of the front line sectoral regulators, while the second tier consists of the appeal mechanism for resolving disputes about license modifications proposed by the regulator. The paper argues that this two tier system has a number of strengths, and then goes on to consider several of the proposals for changes that have recently been made.

New Product Development and Product Supply within a Network Setting: The Chilled Ready-meal Industry in the UK

This paper analyses inter-organizational networks that link together firms operating in the food processing and distribution industry in the UK. In doing so, the paper draws on insights recently developed by Mark Casson that treat inter-firm networks as an institutional response to the changing costs and opportunities of information management. Detailed analysis of product innovation and supply-chain management issues within the industry, exemplified by the growth of chilled ready-meals, leads to the identification of two distinct but complementary inter-firm networks: a network of control and a network of innovation. In each case, the study finds that the critical information is derived from the retailers' interface with consumers and thus that these information-based networks are effectively controlled by the leading supermarket chains. The study's conclusions are considered in relation to the recent findings of the UK Competition Commission following its investigation into grocery retailing in Britain.

The Napp Case: A Study of Predation?

The Napp decision was the first case in which the Director General of Fair Trading fined a company for abuse of a dominant position under the UK Competition Act 1998. The Competition Act introduced competition provisions into national law which mirrored those in the EC Treaty. Napp was charged with predatory pricing and excessive pricing. The heart of the Director’s case against Napp was the redatory pricing claim. He held that Napp had charged excessively low prices for its slow-release morphine product, MST CONTINUS (MST), to hospitals, specifically and consciously raising barriers to entry. Because hospitals were a gateway, according to the Director, Napp was ultimately able to foreclose sales to GPs and thereby to protect the excessive prices which it charged to GPs. On 30 March 2001, the Director imposed a fine of £3.21 million and gave directions to Napp to reduce its list price to GPs by at least 15 per cent, and to sell MST to hospitals at a price which amounted to at least 20 per cent of the list price to the GPs (requiring an increase of hospital prices, on average, of 280 per cent). Napp appealed the Director’s decision but the UK Competition Commission Appeals Tribunal (CCAT), in its judgment of 15 January 2002, largely upheld the Director’s decision. This article focuses primarily on the predatory pricing aspects of the Napp case. The following section addresses some of the more general economic and legal issues of predation, including a brief overview of the economic analyses and an evaluation of various legal tests for predatory pricing. The subsequent section deals with the Napp case. Following a summary of the facts and main legal arguments, we assess the approaches adopted by the Director and the CCAT.

The battle for Safeway

The bid for Safeway announced by Morrisons in January 2003 ended months of speculation as to the next victim in the battle for power in the UK multiple food market. The Morrisons bid provided the catalyst for other major food retailers to express their interest in the Safeway company and its stores (also joined by a number of non‐food retailers). There is little doubt that this battle raises important geographical issues. First is the spatial fit of each of the bidders and the Safeway stores. The key question is who will gain most new regional market share from the purchase of the Safeway stores? The second is the implication for local spatial monopolies in different parts of the UK depending on the likely winner. This will almost certainly be investigated by the UK Competition Commission. The aim of this paper is to examine both these geographical issues and present some what‐if scenarios concerning future amalgamations of store networks.

The impact of food scares on price adjustment in the UK beef market

AbstractThis paper considers the impact of‘food scares, predominately concerns relating to BSE, on UK beef prices at retail, wholesale and producer levels over the 1990s. Acknowledging the co‐movement that exists between prices in the meat marketing chain, we use a co‐integrating framework, the results of which show the importance of publicity regarding the safety of food in the transmission of beef prices in the UK. The‘food publicity’ index that we use has a marked negative impact on the prices at all levels, a result that is consistent with the effect of an inward shift in the demand function. Moreover, the extent of price decline varies between the marketing stages entailing that the price spreads rise in response to an increase in the (negative) publicity about food safety. While not a formal test of market power, these observations are consistent with recent theoretical results demonstrating that market power exacerbates price changes in the upstream sectors for a given change in the retail demand function. The implication of these varying price changes is that the food safety concerns also cause the marketing margins between the stages to widen. The UK's Competition Commission has recently investigated the abuse of market power in the food sector, inspired largely by this specific issue.